July 26 (Bloomberg) -- Remember suburban Phoenix, home of
empty subdivisions with green swimming pools and roving coyotes?
It’s booming again. A house in Glendale got 95 offers and
eventually sold for 17 percent above the asking price.

“This is not something we would see in a normal market,”
says Michael Orr, director of the Center for Real Estate Theory
and Practice at Arizona State University’s W.P. Carey School of
Business.

After falling 57 percent from 2006 through last October,
Phoenix metro housing prices rose 12 percent through April and
have continued upward since, according to the Standard &
Poor’s/Case-Shiller home price indexes, Bloomberg Businessweek
reports in its July 30 issue. In Atlanta, meanwhile, the housing
recession is far from over: Home prices fell 17 percent in the
year through April to their lowest point since 1997, according
to Case-Shiller.

Housing is most Americans’ biggest asset and crucial to the
health of the overall economy, so it’s natural to ask when it
will get back to normal. As the contrast between Phoenix and
Atlanta shows, the answer is: not yet.

The sector remains roiled by extremes. The lowest mortgage
rates in history, courtesy of a recession-fighting central bank,
coupled with the biggest drop in housing prices since the
Depression, have made homes the most affordable since 1970,
according to the National Association of Realtors.

Down Payment

But people can’t scrape up a down payment when mortgages on
their current residences are underwater. Banks have tightened
lending standards even as the bad economy has lowered many
borrowers’ credit scores. And the country is stuck in the
longest period of 8 percent-plus unemployment since the
government began keeping track in 1948.

These powerful positive and negative forces are almost
canceling each other out, leaving a small net “up” nationally.
Zillow, an online marketplace, said on July 24 that home values
in the second quarter posted their first year-over-year increase
since 2007.

The next day the Department of Commerce said new-home sales
fell 8.4 percent in June--and revised previous months’ sales up.
The push and pull are not what anyone would call normal. “Most
local housing markets still have a way to go to achieve a clean
bill of health,” economists at the Federal Reserve Bank of New
York wrote in a July 17 report.

Phony Recoveries

Home prices fell by a third from 2006 through 2009 and then
staged three phony recoveries before slumping again. The
Standard & Poor’s/Case-Shiller National Home Price Index hit a
post-bust low in the first quarter of 2012, dropping to 2002
levels. After such gyrations, it’s hard for anyone to say that
prices are even roughly correct at today’s levels. “What’s
normal?” asks Comerica Bank Chief Economist Robert Dye.

Now that housing is cheap in comparison with rents and
incomes, the biggest risk is a faltering economy. “If the
broader economy weakens in the short term, the housing rebound
could again stall,” says Harvard University’s Joint Center for
Housing Studies annual report.

That’s a real possibility as forecasters mark down their
outlooks for economic growth. Sam Khater, senior economist for
CoreLogic, a housing data company, says in a new report that
home prices have little room for further increase because they
are highly correlated to median incomes, which, he points out,
“have not increased on an inflation-adjusted basis since
1996.”

Shadow Inventory

Although the so-called shadow inventory of unsold real
estate has shrunk since its 2010 high, CoreLogic calculates that
there are still 1.5 million homes in various stages of
delinquency or foreclosure that don’t show up in measures of
housing supply. “The broad dynamics are still quite scary,”
says Michael Feder, chief executive officer of housing data
company Radar Logic, in a July 24 report. “We think housing is
still a short.”

At least residential real estate is no longer dragging down
the rest of the economy. The rebound in home prices and decline
in mortgage debt has begun to restore Americans’ housing wealth,
which helps the economy by making them more willing to spend.

According to Fed data, owners’ equity in household real
estate fell by $7 trillion, or more than half, from the end of
2005 through the last quarter of 2011. It increased by about
$400 billion in the first three months of this year, the fastest
pace of growth in more than 60 years.

Construction Recovering

Construction is recovering, too. It’s been adding to gross
domestic product growth since the second quarter of 2011,
according to Department of Commerce data. The industry’s
prospects are generating excitement in the stock market. The S&P
Supercomposite Homebuilding Index, which fell almost 90 percent
from 2005 to 2008, is up 50 percent in 2012 as of July 23, eight
times the gain of the Standard & Poor’s 500-stock index.

There’s plenty of room for homebuilders to grow. Even after
the latest uptick, starts on new homes are running at a pace
that’s less than half what’s needed to accommodate the demand
from young people moving out on their own, plus replacement of
obsolete or damaged dwellings, says David Dwyer, director of
global research for Bloomberg Industries.

“This has been such a historic depression in housing that
as soon as you see signs of a turn,” he says, investors in
homebuilder stocks tend to “move first and ask questions
later.”

If events unfold perfectly, the contradictory forces
pushing on the housing market will moderate. The Fed will allow
interest rates to rise from their historic lows. Simultaneously,
the economy will gain momentum and generate more jobs.

Likewise, the oversupply of foreclosed homes will be
absorbed by pent-up demand from young families that have been
shut out of the market. “Demographics will assert themselves at
some point,” says Macroeconomic Advisers, a St. Louis-based
consulting firm. Over time, then, the U.S. housing market will
become increasingly normal. Just not yet.